Dual-class Firms Research Articles

CSR performance of dual-class firms in different life cycle stages

ABSTRACT This paper investigates the relationship between corporate social responsibility (CSR) performance and different phases within a firm’s life cycle. Drawing on a sample of U.S. public firms spanning the period from 1991 to 2018, our empirical findings reveal distinct patterns: Younger firms with dual-class equity structures tend to allocate fewer resources to CSR initiatives compared to their single-class counterparts. However, as firms progress into the mature phase of their life cycle, dual-class firms exhibit superior CSR performance compared to single-class firms. Furthermore, we also observe that CEO compensation in dual-class firms tends to be higher during the mature phase. Those findings make a substantial contribution to the fields of agency theory, corporate governance, and business ethics.

Dual-class share structure and dividend smoothing

This paper delves into the implications of the dual-class share structure, an increasingly prevalent ownership model, for dividend smoothing behaviors. Using a large sample of the U.S., our analysis reveals that firms with dual-class share structures exhibit lesser dividend smoothing behaviors compared to their single-class counterparts. The influence of the dual-class share structure on dividend smoothing is more significant among firms characterized by high free cash flows, limited growth prospects, and those in their mature stages. Furthermore, we observe a higher propensity for dividend reductions or omissions in dual-class firms.

Cash Savings in Dual Class Firms

We investigate the relation between the utilization of dual-class shares and the cash flow sensitivity of cash. Dual-class share structures are on the rise and are frequently used as an indicator of governance quality. Almeida, Campello, and Weisbach (2004) measure the cash flow sensitivity of cash as a gauge of savings from current-period cash flow. Our study contributes to both corporate governance and cash management domains by comparing the cash savings practices of dual-class share companies with those of single-class share companies. We discover that dual-class firms exhibit a higher cash flow sensitivity of cash, indicating that they tend to accumulate more cash from their cash flows.

Dual-class share structure and firm risks

While costs associated with dual-class share ownership structures are widely documented, the benefits are seldom studied in the literature. We present evidence that a dual-class share structure promotes corporate risk-taking by providing insulation to insiders, such as management and controlling shareholders, from short-term market pressure. We then show that dual-class shares increase the market valuation of firms with high corporate risks, in contrast to the finding in the literature that a dual-class share structure is associated with lower valuation and performance. To provide a possible channel through which dual-class firms can increase corporate risk-taking, we find that dual-class firms are more likely to engage in mergers and acquisitions (M&As), especially non-diversifying M&As. We address endogeneity concerns by using a sample of share unifications and show that when dual-class firms change to single-class status, their corporate risks decrease.

Does wedge size matter? Financial reporting quality and effective regulation of dual-class firms

Dual-class capital structures create a gap (“wedge”) between voting and cash flow rights. Our analysis indicates that the larger the wedge, the higher the quality of financial reporting, reflecting a tradeoff between the dilution of voting rights and enhancement of the credibility of information provided to investors. It suggests that increasing management’s insulation from the market for corporate control is stronger than agency costs, reducing motivation to manipulate earnings. Moreover, better quality reporting allows for attracting second-class investors who agree to a larger wedge. Therefore, concerning financial reporting, a nuanced regulation restricting wedge size may not be more effective.

Dual-Class Firms, Agency Problems, and Debt Governance: Evidence from Korea

Dual-Class Firms, Agency Problems, and Debt Governance: Evidence from Korea

Corporate Cash and the Firm’s Life-Cycle: Evidence from Dual-Class Firms

Corporate Cash and the Firm’s Life-Cycle: Evidence from Dual-Class Firms

Disproportional control rights and debt maturity

Using a hand-collected sample of U.S. dual-class firms, we find that corporate debt maturity increases in insiders' disproportional control rights, which is robust to several robustness tests. This relation is more pronounced among firms more vulnerable to control disruption. Besides, firms with greater disproportional control rights issue more long-term new debt. Further analysis of the stock market reaction to new debt issuance shows that controlling insiders' preference for long-term debt benefits outside shareholders. Overall, our findings suggest that the benefits of minimizing control disruption surpass the costs of long-term debt in insider-controlled firms.

The Life Cycle of Dual-Class Firm Valuation

Abstract We examine U.S. dual- and single-class firms from 1980 to 2019 and document their valuation differences over their corporate life cycle. At the IPO, dual-class firms have higher mean valuations than do single-class firms, and some evidence indicates that this premium may emanate from dual-class firm founders’ unique vision and leadership skills. As firms age, the valuation premium of dual-class firms tends to dissipate, possibly because dual-class agency problems increase due to a gradual widening of the wedge (the difference between insider voting and cash flow rights) in the post-IPO years. (JEL G32, G34)

Dual-class share structure on the dividend payout policy: Evidence from China Concepts Stocks

This study investigates the impact of the dual-class share structure on the dividend pay-out policy for China Concepts Stocks listed on the US stock exchanges. Using a unique and hand-collected dataset, we find that the dual-class share structure negatively affects the propensity to pay dividends and the dividend payout ratios. Among firms with dual-class share structures, the divergence between voting and cash-flow rights also negatively affects the propensity to pay dividends and the dividend payout ratios. Furthermore, these dual-class firms are more susceptible to the tunneling to controlling shareholders. Our findings highlight the potential cost of adopting dual-class share structures in China, and the importance of external monitoring for Chinese US-listed firms with dual-share structure.

Dual-class stock structure and firm investment

Dual-class stock structure helps insiders gain control through different voting rights, but also exacerbates the principal-agent conflict. The separation of control rights and cash flow rights enhances managerial opportunistic behavior. We find that dual-class stock structure aggravates the over-investment behavior of listed firms. The impact of free cash flow on over-investment is more severe in dual class firms than in single-class firms. Paying cash dividends reduces the effects of dual-class stock structure, and separation of control and cash flow rights on overinvestment. Regulators need to strengthen the supervision to restrict managerial opportunistic behavior in firms with dual-class share structure.

Corporate cash and the Firm's life-cycle: Evidence from dual-class firms

This research explores whether a dual-class ownership structure affects a firm's propensity to stockpile cash reserves over the life cycle stages. Using a sample of U.S. dual-class firms, evidence shows that the cash holdings of dual-class firms are significantly lower than that of single-class firms by 2.42%. The dual-class firms that exploit external debt financing deploy more cash for acquisition activities. More importantly, dual-class firms decrease their cash holdings by only 2.8% when growing from young to mature, while single-class firms decrease that by 5.88%. During the mature stage, the dual-class firms experience a larger fall in operating net cash flow, cash acquisition expenditure, and debt financing than do single-class firms. These findings, however, are only significant for firms with high information asymmetry. Our evidence of changes in cash holdings shows that agency costs associated with dual-class ownership increase over the life cycle.

The rise of dual-class stock IPOs

We create a novel dataset to examine the recent rise in dual-class IPOs. We document that dual-class firms have different types of controlling shareholders and wedges between voting and economic rights, and that the increasing popularity of dual-class structures is driven by founder-controlled firms. We find that founders’ wedge is greater when founders have stronger bargaining power. The increase in founder control over time is due to greater availability of private capital and technological shocks that reduced firms’ needs for external financing. Stronger bargaining power is also associated with a lower likelihood of sunset provisions that terminate dual-class structures.

A risky affair: Dual class and FX hedging

We highlight the risk management activities of dual class firms by focusing on their use of foreign exchange (FX) derivatives. As opposed to single class firms, dual class firms engage in lower levels of FX hedging activities which may be driven by their long-term orientation and insulation from short-term market pressures. Furthermore, we document that these firms have a stronger reluctance to using futures contracts for FX hedging due to their preference for opacity and hesitancy to divert resources away from their long-term goals. Overall, we underscore the influence of a firm's share structure on its FX hedging decisions.

Executive compensation disclosure, ownership concentration and dual-class firms: An analysis of Swedish data

We study how executive compensation disclosure (ECD) is affected by the economic incentives of owners and managers in a Swedish setting where agency conflicts are not so much between managers and owners, but between controlling and non-controlling owners. In our sample, control is often enhanced through mechanisms such as dual share classes. The analysis relies on detailed hand-collected ECD data from 2837 annual reports. As expected, disclosure decreases with ownership concentration and the owner’s excess voting rights. In Sweden, overpaid Chief Executive Offices (CEOs) improve ECD quality, but this is not the case when the controlling owner has excess control rights. This suggests that when managers have a bond with controlling owners, ECD is part of the agency problem between controlling and non-controlling owners, and executive compensation plays a different role than in previously studied Anglo-Saxon settings.

Disproportional Ownership Structures and R & D Investment: an Investor Protection Perspective

As two main types of disproportional ownership, dual-class equity structures and stock pyramids are widely adopted in practice to endow shareholders with extra voting rights. However, comparative research based on these two forms of ownership structures is rare. Using panel data consist of dual-class firms and pyramidal firms during 2010-2018, this paper examines the effect of disproportional ownership structures on firm’s R & D investment. We find that compared with stock pyramids, dual-class structures are more conducive to the corporate R & D investment; however, large ownership-control rights divergence of the dual-class equity structures has a negative moderating effect on the relationship between dual-class equity structures and R & D investment of the firm. As an essential component of investor protection, equity balance exerts a three-way interaction effect to further weaken the moderating effect of ownership-control rights diver8gence in dual-class equity structures. This paper not only confirmed the positive influence of dual-class equity structures on the firm’s R & D investment, but also provided evidence for the mechanism of the combined “contact perspective” and “legal perspective” in investor protection literature.

The Price Effect of Stock Repurchases: Evidence from Dual Class Firms

We examine a sample of dual-class firms to isolate the magnitude and duration of the demand-driven price effect from stock repurchases. In this novel setting, the non-repurchased class serves as a near-perfect counterfactual to the repurchased class and controls for private information about firm value contained in the repurchases. The average repurchase in our sample, 0.30% of outstanding shares within a month, increases the stock price by 40 to 70 basis points relative to the non-repurchased class of stock. The effect dissipates completely over the subsequent month unless extended by continued repurchases. This small, short-lived price effect leaves little scope for CEOs to benefit from value-destroying repurchases motivated by self-interest. This paper was accepted by Victoria Ivashina, finance.

Dual class firms and trade credit

Firms with dual class structure can suffer from poor corporate governance and may utilize strategies that can help them avert monitoring by outsiders. We find that dual class firms use less trade credit as compared to non-dual class firms. We believe that this behavior is motivated by their antipathy towards supplier oversight. Our results are especially relevant for non-manufacturing and high bargaining power dual class firms. We extend the literature by shedding light on trade credit policies of dual class firms and by presenting an additional metric to assess operational transparency and monitoring preferences of dual class firms.

Excess insider control and corporate social responsibility: Evidence from dual-class firms

We investigate the corporate social responsibility (CSR) performance of firms with a dual-class share structure. Dual-class firms, which represent a fast-growing segment of the U.S. capital market, violate the "one share, one vote" principle by giving corporate insiders control in excess of their economic interest in the firm. We observe a negative association of excess insider control and firms’ CSR performance, primarily with respect to the community- and employee-related dimensions of CSR. Extended analyses reveal that this negative association is mitigated by high financial resource availability. Consistent with a trade-off between corporate spending on CSR or on benefits for insiders, we also observe a negative association between CSR performance and executive pay in dual-class firms. Taken together, these extended analyses are consistent with self-interested behavior of entrenched insiders who, unless resources are abundant, appear to reduce CSR activities to maintain resources available for their personal benefit. While the exposure to risks engendered by a dual-class equity structure may be reflected in the share price, our findings draw attention to an externality: diminished CSR performance affects not just shareholders, but all stakeholders.

The Rise of Dual-Class Stock Ipos

We create a novel dataset to examine the nature and determinants of dual-class IPOs. We document that dual-class firms have different types of controlling shareholders and wedges between voting and economic rights. We find that the founders' wedge is largest when founders have stronger bargaining power. The increase in founder wedge over time is due to increased willingness by venture capitalists to accommodate founder control and technological shocks that reduced firms' needs for external financing. Greater founder bargaining power is also associated with a lower likelihood of sunset provisions that eliminate dual-class structures within specified periods.